Investing in a holiday rental property

Clients often ask for my opinion on the investment benefits and tax consequences of purchasing a buy to let property. Personally, I believe that a UK holiday letting property gives a significantly better tax result. You can also use it yourself! What are the Income Tax benefits?
The Income Tax benefits of a holiday letting are as follows:

Losses can be set against your other non-rental income. Losses from a buy to let for example cannot be used in this way.
income is regarded as earned and can be used for the purposes of calculating a personal pension premium,
capital allowances may be claimed instead of the wear and tear allowance
The good news does not stop there. There are also Capital Gains Tax savings.

What are the Capital Gains Tax savings?
The Capital Gains tax savings of a holiday letting are as follows:

· rollover relief is available. This means you can defer a tax bill by investing the proceeds from a sale of a furnished holiday letting into another holiday letting or business asset

· you can give away a furnished holiday let and avoid a Capital Gains Tax bill by claiming a special tax relief called holdover relief

· the property qualifies for Business Asset Taper Relief. This means that you only pay 10% Capital Gains Tax if you sell a qualifying property owned for at least two years.

How about Inheritance tax?
We have researched the Inheritance Tax consequences of owning a furnished holiday letting. Set out below in italics is a direct quote from HM Revenue and Customs’ own instruction manuals.

The Revenue solicitor has advised the Office that in some instances the distinction between a business of furnished holiday lettings and, say, a business running a hotel or motel may be so minimal that the courts would not regard such a business as one of ‘wholly or mainly holding investments” for the purposes of IHTA 1984 s105(3 .
You should normally allow (business property) relief where:

The lettings are short term (for example weekly or fortnightly);
The owner – either himself or through an agent such as a relative or housekeeper, was substantially involved with the holidaymaker(s) in terms of their activities on and from the premises even if the lettings were for part of the year only.
This means a holiday letting property qualifies for 100% exemption from Inheritance Tax.

How does a rented property qualify as a holiday letting?
To qualify as a holiday letting a property must meet all of the following conditions:

it must be let furnished
it must be available for letting for 140 days in a 12 month period
it must be actually let for 70 of those days
the same person must not occupy it for more than 31 consecutive days during 7 months of the same 12 month period.